What’s in this week’s EU CSR Communication and Transparency Directive for investors?

The European Commission called it an “ambitious strategy” for Corporate Social Responsibility (CSR) with the aim of improving trust, consumer confidence and companies’ contribution to society’s well-being. And few could fault the ambition of this week’s tripartite announcement: a Communication on CSR, a revised EU Transparency Directive and a Social Business Initiative, all issued on the same day. Link
The Commission said its efforts to engage with the private sector on social and environmental issues were “especially relevant” in times of EU public budget constraints. Notably the CSR Communication lays down a nuanced interpretation of what CSR means, calling it: “the responsibility of enterprises for their impacts on society”. Its message was clear: “To fully meet their corporate social responsibility, enterprises should have in place a process to integrate social, environmental, ethical, human rights and consumer concerns into their business operations and core strategy in close collaboration with their stakeholders.” The outcome, the Commission said optimistically – alluding to the language of Michael Porter at Harvard University in his article earlier this year for the Harvard Business Review – would be “shared value” for owners, shareholders, stakeholders and society at large. It would also identify, prevent and mitigate possible adverse impacts. So far sogood in RI/CSR speak. But perhaps it was too much to expect to find a clear set of regulatory/voluntary goals for achieving these ends in a time of unprecedented economic crisis. So while the EU talked softly and richly of “multi-stakeholder platforms” and “promotion of shared interest”, it was less easy to find the detailed hard policy levers within the documents that will move CSR forward with purpose. There were though a few important regulations and works-in-progress of note for investors. One was a clear pricing signal for ESG savvy companies via an EU commitment to “buy social”. The Commission set a target that by 2010, 50% of all public procurement in the EU should comply with agreed environmental criteria. There are caveats: the integration of E&S criteria into public procurement must not discriminate against small- and medium-sized companies (SMEs), nor undermine the principle of best value. But it will favour those companies with strong ESG policies, and the Commission published earlier this year a guide on Socially Responsible Public Procurement (SRPP) that will act as guidance. The topic of required disclosure of corporate social and environmental information was also high on the agenda. The Commission noted that there were already a number of international reporting frameworks such as the Global Reporting Initiative. But it

said there needed to be level playing field for the data issued by companies across all sectors. As part of its Single Market Act it said it would present legislative proposals to this effect, including impact assessments on competitiveness, notably for SMEs. It said it was also developing policy to encourage companies to measure, benchmark and disclose environmental performance using a common life cycle based methodology. Conversely, so-called ‘greenwashing’ will come under the Commission’s regulatory gaze. It intends to stop misleading environmental marketing under an Unfair Commercial Practices Directive planned for 2012. While not backing it explicitly, the Commission said integrating financial and non-financial reporting was an important goal and that it was following with interest the work of the International Integrated Reporting Committee. In addition, it said it would create a peer review mechanism next year to enable EU governments to compare their national CSR policies, an element which could create a virtuous influence loop. The Transparency Directive also included a major announcement on financial reporting, abolishing the obligation for listed companies to present quarterly financial reports. The Commission appears to have been influenced by the spotlight on corporate short-termism as one of the major barriers to long-term investing, noting: “This option should reduce short term pressure on issuers and incentivise investors to adopt a longer term vision.” It said investor protection was sufficiently guaranteed through the mandatory disclosure of half yearly and yearly financial results. And it said the change would enable small and medium-sized companies to redirect resources to publish information better suited to their shareholders. Human rights reporting also took a major step forward in the EU CSR Directive. The supporting backdrop of this year’s ‘Ruggie’UN Guiding Principles loomed large. The Commission said it would work with companies and stakeholders during 2012 to develop human rights guidance for high-risk industrial sectors. It also invited EU Member States to develop by the end of 2012 national plans for the implementation of the Ruggie Principles. Country-by-country financial reporting also received a major tonic in the Directive: Link to RI story Unfortunately, however, the Commission’s Social Business Initiative appears to hold little of note for institutional investors. It seems shoe-horned into a not-for-profit model that eschews some of the developments in microfinance and impact investing that have corralled private, socially and profit-oriented capital. So while the Initiative notes that: “increasing numbers of investors are seeking to combine social or environmental results with their legitimate concern of obtaining a financial return on the investment, while pursuing long-term objectives in the general interest,” it does little to suggest how a proposed “European instrument supporting funding of social enterprises” would encourage institutions to invest. It concludes in a rather lacklustre fashion: “A regulatory framework designed to create such investment vehicles at European level might be desirable.” Nonetheless, responsible investors should be heartened by the EU’s backing this week. Its suggestion that investors themselves are corporate CSR entities and should disclose their own RI/CSR policies is especially welcome. As is its backing of the UNPRI. But perhaps more important still is the Commission’s broader declaration that it will initiate debate on the role and potential of business in the 21st century and carry out periodic surveys of trust in business and attitudes towards CSR. It suggests that responsible corporate behaviour – and by dint responsible investment, will be at the vanguard of future policy.